Why do wealthy people get better investment options?

Dear Pete,

My uncle is a very wealthy man, and has some of the best investment opportunities in the world, because of his wealth. He tells me that wealthy people get access to better investments. He mentioned something about being a credited investor. How do I become one of those? And how do wealthy people get better investments than average people?

Robert

Hey Robert,

Thanks for the question. Just to clear it up, I think you mean accredited investor - easy to mix up. What troubles me the most about your question is the use of the word better. What does "better" really mean? Is it exclusivity? Is it access? Let's dig into what an accredited investor is to see if it's really what you think it's cracked up to be.

In order to become an accredited investor you must have an annual income in excess of $200,000 for at least 2 out of the last 3 years, or a net worth of 1 million dollars. The SEC makes special exceptions for those who meet this criteria. While this sounds really exciting, all it really means is the SEC offers them less protection. Why less protection? Because if you make over 200k a year or have a net worth of at least 1 million you are considered a "sophisticated" investor. Yeah those quote marks are pointed. It's a problem when we equate high income with investment knowledge. Just because someone makes a good income, doesn't mean they possess great investment instincts. That's just now how it works.

But I get it, you are attracted by the allure of access. So what exactly can you expect when you receive this badge of honor? Accredited investors have access to things like hedge funds. You've probably heard the term, but here's what hedge funds are: they are highly unregulated investment vehicles which can break all the rules. This is why only those deemed worthy by the SEC can invest in them.

Think of Warren Buffett what you will (I'm indifferent about him) but I do love this story. In 2008, Buffett made a bet with a New York hedge fund firm that he could outperform a hedge fund over a 10 year period with a single investment. Buffett choose an S&P 500 index fund, and he told the hedge fund managers they could invest in whatever they wanted. You can see where this is going, very tortoise and the hare. Through the end of 2014, Buffett's choice has appreciated in value over 63%. The hedge fund? Over 19%.

Elite access doesn't make something great. In fact, those with true investing smarts can make what they have access to work for them.

(courtesy of WIBC)